No rest for smaller e-retailers

By Stefany ZarobanDirector of Research

Second 500 merchants faced challenges in 2012, notably keeping up with Google’s changes.

It was another year of double-digit growth for the small retailers in the new Internet Retailer Second 500 Guide. With a 15.6% online sales increase in 2012, the niche merchants of the Second 500 outgrew their larger rivals in the Top 500 Guide with Amazon.com Inc. factored out, and their growth, was close to total U.S. e-commerce growth of 15.9%, according to the U.S. Department of Commerce.

However, some small to mid-sized merchants in the Second 500, as well as their technology providers, say that growing a niche online store and succeeding in e-commerce isn't as easy as it used to be. Small retailers must be more nimble than ever, as it's getting harder to compete online with Amazon.com Inc. and other large players that are expanding their online product offerings and continually adding web site features. New players continue to enter e-commerce, ratcheting up competition, and shoppers are demanding more from the e-commerce sites they frequent.

For many smaller online retailers, the changes Google Inc. introduced last year had them scrambling. Among them is JMX International, which operates niche home furnishings sites like DutchCrafters.com, a seller of Amish furniture. JMX has grown steadily since its founding in 2002, but in 2012 experienced a 9% drop in sales, to $1.8 million.

Much of that was due to a large decrease in traffic from natural search results, following Google’s release of its Penguin algorithm in the second quarter of 2012, says CEO Jim Miller. The Penguin update penalized web sites with duplicate content and incoming links of poor quality. JMX also took a hit when Google eliminated its free product listings in its Google Shopping program, listings that appear prominently on Google.com, substituting paid Product Listing Ads. “We prepared for this change and welcomed it as an opportunity to raise our game to the next level with Google Shopping,” he says. “But once it was live, we couldn’t figure out why some products had good placement and others didn’t.”

Staffers eventually figured out the new Google Shopping system and the e-retailer is now generating a large percentage of its revenue—Miller would not say how much—from the program.

Aiming to move back up in natural search results, JMX fired the vendor it was using for search engine optimization and hired National Positions to expand its link-building program and rid its site of content that hurt its standing with Google. JMX now spends around $3,600 per month on SEO, compared to $1,500 per month last year. The merchant has also put a growing focus on social media, which has helped to build loyalty among its existing customer base.

These efforts are all paying off for JMX—by the end of June this year, the merchant will have already outpaced its $1.8 million in sales last year. “2012 was a rough year for us, but we are already coming out of it,” Miller says. “We’ve diversified a bit and now we are just excited to bring our business to the next level.”

The next level for many Second 500 merchants will be growing sales enough to be listed in the Top 500 Guide. Small merchants are up against increased competition, pricing pressure and reacting to shifts in online traffic patterns. The ones most likely to make it to the Top 500 are those navigating the increasing competition online with strategies that set them apart, says Tom Byun, head of Yahoo Small Business, which provides e-commerce platform software and other services to online retailers, including 34 merchants in the Second 500 Guide.

The most successful small online retailers are connecting with shoppers in ways larger rivals can’t or won’t, Byun says. “This is where a small business can truly have an advantage is building a unique voice with customers. You need to have a number of vehicles to get your brand out there, drive traffic and experiment with ways to drive sales. You’ve got to be doing something different.”

The 2013 Second 500 Guide is available in three formats: print, digital and as part of the all-new and completely updated Top500Guide.com. Information on how to order the brand-new 2013 Second 500 Guide is available here.